Bank of Israel backs Kahlon's tax cuts

However, the Bank of Israel is concerned that the cost will require the government to find extra funding sources.

The Bank of Israel has responded positively to the range of measures announced on Tuesday to lower the cost of living. The Bank of Israel said, "These are worthwhile steps that combine well with the government's strategy of encouraging employment, reducing poverty amid the working population and helping young working families. It also matches the policy recommendations of the Bank of Israel. Because we are talking about measures that respond to structural problems and not being brought to serve temporary needs of expanding economic activity, which are anyway booming, it is important that any measures will be permanent and not for just 18 months."

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The Bank of Israel added that at this stage it is difficult to evaluate exactly how much the measures will cost. The various measures take effect at different times and it is not yet clear when the disability pension will be raised although it is clear that the cost will be substantial.

However, the Bank of Israel warns the plan will eat into the reserves for special needs in the government's 2018 budget and assuming the changes are permanent the government will need to find additional funding if it is to meet its 2019 and 2020 budgetary targets.

Bank of Israel Governor Karnit Flug has in the past warned against tax cuts, arguing that investment in education and infrastructure for the longer term are more important.

This approach was also reflected in the Bank of Israel's statement today. It said, "In addition to the plan presented, it is important that the government will continue to take policy measures that will bring about an improvement the human capital infrastructures and physical capital in the economy and thus increase the potential for growth of the economy in the long term."